Wednesday, December 1, 2010

December Investment Report - Opportunistic Portfolio

November was another great month with the Opportunistic Levered (Arbitrage) portfolio up 9.76% making the third month in a roll that it has gained more then 9%. More importantly the portfolio had a strong gain even with the market basically flat. After a strong two month period over September and October, it wasn't surprising that the market struggled in November especially considering the huge run up to the elections and QE2. Fortunately for this portfolio, several stocks powered ahead further highlighting the reasons to avoid indexes that automatically invest in the bad stocks along with the winners.

What were the winners? Mainly commodity and cloud computing names. Massey Energy (MEE), Riverbed Tech (RVBD) and Terremark Worldwide (TMRK) were some of the top gainers. MEE had decided to pursue selling the company and hence the stock soared. With its 1.3B mt of metallurgical coal reserves, the company will be an attractive buyout target. Due to the mine tragedy back in April, these coal assets are clearly more valuable to an acquirer then to MEE burdened my higher regulatory oversight. RVBD and TMRK both continue to benefit from the red hot cloud computing sector.

The other main gains came oddly from small cap China plays. Oddly because the Chinese stock market took a big hit at the end of November but the stocks of Puda Coal (PUDA) and Lihua International (LIWA) powered higher. So while investors remain concerned by rate hikes in China, these two stocks finally drew investor interest. This highlights the benefits of finding off the radar stocks that provide ample room for appreciation. Once discovered by the market the gains can be significant over a short period. The market remains mysterious, but the gains are always sweet nonetheless.

Other then some minor hedging with a short of the Drexion Small Caps Bull 3X (TNA), the trading was very limited in November. Sold Teradyne (TER) early in the month after they forecast weak orders and earnings for Q4. While the stock still remains cheap on a valuation basis, it likely won't move over the next year as the company reports year over year declines. The market tends to not invest in a company showing declines regardless of valuation. Bought Limelight Networks (LLNW) as the month came to a close to regain exposure to the tech sector after the sell of TER. LLNW has the potential to gain in the CDN market as data traffic continues to explode. Recent deals with Groupon and Netflix (NFLX) provide the possibility that this company will finally push money to the bottom line. Something that for now hasn't happened and has held the stock down.

With the market pause in November, I'm back to a more bullish stance on the market. The model is levered at roughly 1.5x and will greatly benefit from a market that rallies into year end. The fear over the European debt crisis seems over done considering the issues are well documented by now. China is growing fast enough to handle any rate increases so that seems to be another over reaction. North Korea? Don't even get me started. As these negatives get picked off one by one look for the market to move higher likely to new highs for the year.

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